Despite rising mortgage rates, the housing market managed to remain stable due to homeowners holding onto lower-rate mortgages, creating a home shortage and keeping demand high.

Housing affordability has declined, leading to a shift towards more affordable homes, especially for first-time buyers.

LGI Homes (LGIH) has capitalized on this by focusing on entry-level homes that are priced cheaper.

Despite economic volatility, the company has seen growth in sales, increased community count, and maintained strong profit margins.

LGI Homes plans to expand further, positioning itself well to meet the continued demand for affordable housing.

Investor Essentials Daily:
Thursday News-based update
Powered by Valens Research

While mortgage rates have risen sharply this year, the housing market has shown resilience with homebuilders’ stocks slowing but not collapsing.

This resilience is largely due to two key factors: The ongoing mortgage rate gap and declining housing affordability.

Many homeowners are locked into mortgages with lower interest rates from previous years, making them hesitant to sell their homes now that rates have risen.

The average fixed mortgage rate gap between existing mortgages and new loans is 320 bps.

This has created a shortage of homes on the market, keeping demand high even as buying a home becomes more expensive. Fewer people are willing to sell, so buyers have fewer options, which keeps home prices elevated and the market stable.

At the same time, the long-term decline in housing affordability has played a major role in shaping the current market.

Over the years, the cost of buying a home has steadily outpaced wage growth, making it harder for people to afford homes.

The median listing price more than doubled in the last decade. It went from around $200K in 2014 to almost $450K currently. The median income didn’t keep up with this increase. This trend is driven by factors like rising land and construction costs and increased demand for housing in desirable areas.

As a result, there’s been a shift towards more affordable housing options, particularly for first-time buyers who are most affected by these rising costs.

This is where homebuilders providing starter homes like LGI Homes (LGIH) come into play…

LGI Homes has carved out a niche in the market by focusing on entry-level homes priced around the mid-$300K range.

Over the past year, LGI Homes’ stock has been volatile, swinging between highs and lows due to broader economic factors like interest rates.

However, despite this volatility, LGI Homes has remained strong, thanks to its focus on affordable housing and growth.

In 2023, the company reported a 2.3% increase in sales, with unit home sales rising by 1.6% to 6729 homes.

This growth was fueled by expanding their community count, which increased from 92 in 2022 to 130 currently.

Additionally, LGI Homes managed to maintain strong pricing, with the average selling price of their homes increasing by 4.6% to approximately $364K.

The company has been able to keep its costs under control, which has helped them maintain solid profit margins.

In Q2 2024, it reported a gross margin of 24.4% and an adjusted gross margin of 26.3%, surpassing its pre-pandemic levels.

These strong margins are a result of careful cost management and strategic pricing, even as the broader market faces pressure from rising input costs and competitive challenges.

Looking forward, LGI Homes is in a good position to continue growing. The company plans to expand its number of communities, aiming to have over 150 by the end of 2024 and more than 180 by the end of 2025. This expansion should drive further revenue growth, even if home prices level off.

As the trend towards smaller, more affordable homes continues, LGI Homes is well-prepared to meet the ongoing demand for these types of housing options.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research